Japan's Seibu: Vultures Are Circling

The fallen business empire is a tempting target, despite its tangled ownership web

Owners of the Tokyo Prince Hotel Park Tower spared no expense in building the 33-story, 673-room luxury property in downtown Tokyo. The $284 million hotel, which opened in April, offers guests everything from an in-house hot spring spa to spectacular views of city landmark Tokyo Tower. Its most expensive suite costs $9,300 a night. But the Park Tower's opulence is now of little value to the company that built it, Seibu Railway Co. Seibu is in so much financial trouble it's mulling sales of some other hotel properties to make ends meet. And vulture investors, including foreign banks, are circling over the whole company, eyeing assets like the Park Tower.

Seibu, the hub of a business empire built by Yoshiaki Tsutsumi, who in 1990 was dubbed the world's richest man by Forbes magazine, has fallen on mighty hard times. Last year the company posted an $81 million loss, saw the ouster of Chairman Tsutsumi, 70, under a cloud of scandal, and was expelled from the Tokyo Stock Exchange for underreporting stakes owned by its top shareholders.

SECRETIVE AND SLIPPERY

Industry observers say the company was strangled by the secrecy that its management held so dear. Ken Moroi, a former banker appointed by Seibu in December to head a reform panel charged with sorting through the mess, faults "a lack of transparency and a corporate culture where people can't speak their opinions." Indeed, by all accounts Tsutsumi ran the public company like a private fiefdom. The top 10 shareholders owned 89% of Seibu's stock, in excess of an 80% limit. One One Seibu affiliate, Kokudo Corp., in which Tsutsumi had a 36% stake, secretly owned nearly two-thirds of Seibu. It did so in part by registering Seibu stock with individuals who owned the shares in name only. And Seibu's senior management didn't hold official board meetings for seven years -- from 1997 until early 2004. In February, a former Seibu president committed suicide after being grilled by prosecutors over his role in the Kokudo scandal.

Tsutsumi was arrested on Mar. 3 by the Tokyo District Public Prosecutors Office and released on $950,000 bail three weeks later following his indictment on charges of insider trading and falsifying financial statements. His court case will begin June 16. Efforts to reach Tsutsumi and his lawyer were unsuccessful. A Seibu spokesman declined to comment on the case.

While Seibu is being run by a transitional team of company managers, Takashi Goto, an official with top creditor Mizuho Financial Group, is expected to be appointed Seibu president on May 24 at an extraordinary shareholders' meeting. Goto will have his hands full. In addition to operating one of Tokyo's main commuter railroads and a rail-freight operation, the company runs dozens of hotels, golf courses and ski resorts, an amusement park in Tokyo, and the Seibu Lions, a Japanese pro baseball club. Seibu expects to report a $2.8 million net loss on revenue of $3.9 billion for the fiscal year ended Mar. 31. The company is also burdened by a $13.3 billion debt load -- mostly borrowings from big banks like Mizuho to fund its real estate development deals.

Despite its managerial disarray, Seibu's assets may well attract outside investors. Its railway business alone is estimated to generate about 30% of sales and 50% of operating profits, while the group overall has positive cash flow of around $236 million. For their part, Seibu and its main bank, Mizuho, say they aren't soliciting bids, nor have they received any yet. But the company's underlying assets make it a tempting target. "It will take a few years, but whoever turns Seibu around and eventually relists it can make a lot of money," says Yasuhiro Matsumoto, an analyst for BNP Paribas in Tokyo.

OUTSIDER'S EDGE

A host of foreign banks and private-equity funds are believed to be interested, including Goldman, Sachs & Co. (GS ) and Morgan Stanley (MWD ). Nihon Keizai, Japan's leading business daily, reported this month that Morgan Stanley is preparing a bid as high as $19 billion for Seibu and that Goldman Sachs may sweeten an unofficial offer of $8.5 billion to around $14 billion. Morgan Stanley says the article is incorrect, while Goldman Sachs, which has snapped up some 85 Japanese golf courses, won't comment and has denied earlier reports of its interest. Any of these figures would dwarf the biggest buyout to date in Japan, New York-based Ripplewood Holdings LLC's $2.2 billion purchase of Japan Telecom Holdings in 2003. "If it happens, it would be a sign that the era of the big buyout deal had arrived in Japan," says Shintaro Hori, managing partner at consultants Bain & Co. in Tokyo.

Potential suitors are bound to be given pause by all the questions about Seibu's balance sheet. But Moroi's panel estimates the sale of 53 unprofitable hotels and other leisure facilities could raise $1.9 billion. Any new management team would also likely try to sell off the company's cherished baseball team, which loses about $19 million a year. And millions of dollars could be raised by launching real estate investment trusts -- a booming market in Japan -- linked to Seibu's numerous properties. What's more, foreign firms may find it easier to take tough decisions than local players. "Foreign firms have the advantage that they can act in a businesslike manner without worrying too much about public opinion," says Hiroshi Okumura, an Osaka-based independent economic analyst.

Yet any takeover would be a shock for a company known for its old-money connections. The Seibu group was founded in 1912 by Tsutsumi's father, who died in 1964, leaving his rapidly growing businesses to his three sons, each of whom took over part of the company. Yoshiaki's half brother, Seiji Tsutsumi, ran the popular Seibu Department Stores Ltd. chain for years before retiring in 1991. While that retailer bears the family name, it has not been implicated in any of the alleged wrongdoing at Seibu Railway.

Things began to unwind for Tsutsumi, the youngest of the clan's three brothers, in April, 2004. That's when he stepped down as Seibu chairman to take "moral responsibility" amid allegations the company made illegal payments to racketeers. Tsutsumi was never charged for the payments, but three other Seibu executives weren't so lucky and received suspended sentences in August, 2004.

Tsutsumi's ultimate fate is unclear, but his legacy at the company will be the tangled ownership web he spun to maintain absolute control. Seibu's new managers must sort out who owns what, a complex task since the masking of ownership stakes dates back to 1957. Once that happens, potential foreign buyers can make their move -- even though that may rankle Japanese uncomfortable with a foreign firm at the controls of a transport utility. Whatever the outcome, the opening of the Park Tower hotel marks the end of one era for Seibu -- and the beginning of another.

By Ian Rowley, with Hiroko Tashiro, in Tokyo

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